In Sunday’s New York Times Alan S. Blinder (former vice chairman of the Federal Reserve) noted I-Fav Chris Dodd’s support for refinancing distressed mortgages to stave off foreclosure.
The approach is simple. A semi-public Corp buys the distressed loan at a discount from the lender. Taken into account the discounted value and current interest rate, the Corp refinances the homeowners loan at affordable terms.
What is the cost? According to Binder the Corp could borrow cheaply and earn a two-percentage-point spread between borrowing and lending rates, which will cover costs and even result in a slight profit. Net: Government program which does not cost the taxpayer a dime!
From the New Deal, a Way Out of a Mess
Alan S. Blinder
A third reason for focusing on foreclosures is that we’ve seen this film before. During the Depression, President Franklin D. Roosevelt and Congress dealt with huge impending foreclosures by creating the Home Owners’ Loan Corporation. Now, a small but growing group of academics and public figures, including Senator Christopher J. Dodd, Democrat of Connecticut, is calling for the federal government to bring back something like the HOLC. Count me in.
The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks — most of which were delighted to trade them in for safe government bonds — and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.
Source: New York Times
Chris Dodd appearing on Imus on February 13th, spoke about the upcoming Banking Committee hearing with Henry Paulson – Secretary of the Treasury, Ben Bernanke – Chairman of the Federal Reserve and Chris Cox – Chairman of the SEC testifying.
Dodd on the scale of the problem: You gotta try to keep people in their homes. This is the worst crisis since the Great Depression. Value of homes for the first time has declined nationally since the Great Depression.
Dodd by the numbers: Expecting home values to decrease by 2% this year followed by 15% next year and 10% the third year! Home sales were off by 12% and new home sales off by 40%.
Dodd on the lending impact: Problem has spread beyond the subprime market to the prime market. Value of homes has declined below the value of the mortgage getting people stuck. Foreclosure goes beyond the effected home reducing the value of every home in the neighborhood by an average of $5,000 by every foreclosure.
Dodd on home equity: For the average person home ownership is the greatest wealth creation and the best stabilizer. Includes equity built up for kids education, health care and retirement. Equity disappearing becomes a huge issue spreading across the economy.
From the WABC archives here is the audio of Senator Dodd’s appearance.
Audio: Chris Dodd